Imperfect Competition Flashcards
What is a Nash equalibrium
When each firm is doing what is most rewarding given the actions of a limited number of opponents. The result of the game theory. This is what happens in oligopolies.
Why are cartels generally unstable
Because each firm has an incentive to produce more and take the market share by lowering prices
What is Bertrand competition
When products are identical and each firm sets the price at the same time. The one with the lowest price gets to sell all its stock.
What is the rational end to the Bertrand competition
Prices at equilibrium aka marginal cost even if there are only two firms in the market
What is Cournot competition
Like Bertrand competition but instead of prices they choose quantity
What is the resulting prices and output in the Cournot competition
Above equilibrium but bellow monopoly. Output is greater than in cartels and monopolies but less than in Bertrand
What is Stackelberg competition
When firms make quantity decisions sequentially. Having identical products and so on
Why is there a first movers advantage in the Stackelberg competition
Because the Stackelberg leader knows what would be the most lucrative choice for the seconds and can take that into account to maximize its profits with its first move
What happens in the Bernard model with differentiated products
Small differences in prices does not lead to the bottom ruling the market
What is monopolistic competition
When firms sell products that are differentiated but substitutes and thus have characteristics of both monopolies and perfect competition
How is economic profits driven to zero in monopolistic competition
By new entries as there are no barriers
Do markets reach equilibrium in monopolistic competition
No but no profit ither
What is the residual demand curve
In Cournot competition it is the demand remaining for a firm output given competitors production
